Local tech startups battle the odds

Irvine’s business climate historically has focused on medical technology, finance and real estate, but young entrepreneurs are beginning to shape a local industry for consumer technology such as mobile apps and websites. They hope to form a new tech hub in Southern California to compete with the Bay Area’s “Silicon Valley.”

These local tech startups face tough competitors, variable market forces and ever-changing technology. Few will make it past their first six months. But for Ray Chan, co-founder of a specialized investment firm, risk is just another day at work.

Revving up

Chan is a managing director at K5 Launch, an Irvine-based investment company that nurtures entrepreneurs and their ideas into companies attractive to a venture capitalist.

K5 Launch’s approach to getting a company rolling is a combination of two strategies: acceleration and incubation.

Both guide the entrepreneurs and connect them with networks of industry experts and often set up the team in an office.

Accelerators nurture the young companies in short, intense phases, three to six months, and take a smaller percentage of the company while seeking a faster turnaround on their investment.

Incubators may raise their companies over several years, and usually own a larger chunk of the company.

“(Both) invest from $25,000 to $250,000 – small scale, early stage,” Chan said. “The whole idea is if they invest into those companies, hopefully they will get to a stage with enough traction, enough proof of concept to be noticed by the venture capitalist, for them to invest tens of millions of dollars into them.”

Exact percentages and timeframes are difficult to define because of so many variables, such as consumer demand and changing technology, Chan said. That is why K5 Launch is a hybrid of these strategies – 60 percent accelerator, 40 percent incubator, he said.

Young companies need more than capital to get them moving. Connecting entrepreneurs with networks of industry experts, market analysts and potential customers is vital – money is just a small part of the equation, Chan said. In return, K5 Launch takes ownership of 6-10 percent of the company’s common stock.

K5 Launch so far has worked with 37 companies in Orange County. One of them is One Aura, founded by Ryan Archdeacon.

One Aura is a mobile app in development that monitors sensors on the customer’s body and collects heart and other health-related data. That data is streamed to a phone app, where the user can view it. With that information, the wearer can adjust their eating and exercise habits, Archdeacon said.

The tech startup movement is at the core of starting a new wave of entrepreneurial spirit in Orange County, Archdeacon said. He and a few other startups mentored by K5 Launch share an office space near John Wayne Airport. The entrepreneurs never have to look far for Chan – he rents an office just down the hall.

But even with assistance, the uncertainty of starting a company is draining.

“It is definitely a ride – there are ups and downs,” he said. “What keeps me going is passion and heart in what I’m doing.”

The responsibility of moving the company forward adds stress to the workload, Archdeacon said. “If something doesn’t go right, what does that mean for us?”

K5 Launch’s physical presence and regular check-ups creates an atmosphere of trust, Chan said. Even though several of K5 Launch’s startups are direct competitors, a friendly camaraderie exists among the offices.

In the end, they all share a common goal: growth and success.

“They know that if they don’t make it, we don’t make it,” Chan said.

Working against the odds

A disciplined team is usually the difference between a company’s success and failure, Chan said, as is their willingness to accept advice.

K5 Launch’s hybrid program starts with validation, when a startup’s team and ideas are tested for resolve and feasibility – 80 percent fail this stage, Chan said. Of the 20 percent that move on to acceleration, another 80-90 percent fail before hitting the growth stage, which is usually about six months in, Chan said.

Of the handful of survivors, 99 percent end up being bought out by larger companies – the Googles of the world, Chan said.

Most young companies fail because their teams break down, he said. “They just don’t have the endurance to fight the battle.”

But they can avoid fizzling by adapting to customer demand and anticipating changes in the market as best they can, which is made harder with constantly evolving technology for mobile phones and other mediums, Chan said.

After a company undergoes acceleration and incubation, some angel investors and venture capitalists may then take an active role in the companies they invest in, but most are hands-off, Chan said.

“The problem is a lot of angels will just invest and leave it to the entrepreneurs themselves to try to make it,” he said. With such risk involved, investors often gamble with many companies at once with the understanding that most of them will fail.

Chan has been an investor for 25 years. He sat on the board of Tech Coast Angels, an angel investment organization that has invested $120 million in about 200 companies since 1997. This organization also is very selective on its investments; of 600 companies that applied for funding last year, 17 were accepted.

For the startups that do succeed, Chan said, he hopes to see the tech industry recognize Orange County as a new hotspot for the tech industry and challenge of Silicon Valley’s might, which includes companies such as Google, Facebook, Intel and Apple are headquartered.

Orange County is a challenging place to try to get tech companies off the ground – Bay Area-based startups have a total advantage because of their entrepreneurial history in the industry, Chan said.

“The fact that they take a lot of care into choosing their companies and mentoring them, it really shows the level of growth that Orange County is experiencing at the moment,” said Vivy Chao, chief executive at Nanoogo, an Orange-based education website.

Though the program is relentless, Chao said Nanoogo has benefited from K5 Launch’s methodical approach in helping to get started.